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THE  RAILWAY  AND  THE  STATE. 


Since  the  nations  of  the  earth  have  been  old  enough  to  trade 


the  control  of  commerce  has  been  undertaken  by  the  state.  Its 
extension  or  restriction  abroad,  its  development  or  direction  at 
home,  and  its  influence  upon  the  wealth  of  the  nation  or  the 
interests  of  classes,  have  all  been  thought  proper  objects  for  the 
exercise  of  the  sovereign  authority.  But  commerce,  if  allowed 
to  take  its  natural  course,  will,  like  all  other  movements  of 
nature,  follow  the  direction  of  the  least  resistance,  and  the  ten- 
dency of  state  control  has  ever  been  to  obstruct  this  natural 
channel  without  supplying  others  which  were  deeper  or  more 
direct.  Control  is  ever  thus  upon  the  verge  of  interference,  and 
has  ever  been  falling  over  the  verge  into  the  abyss  below.  This 
has  been  the  experience  of  the  world.  From  that  experience  we 
have  constantly  added  to  our  knowledge  of  the  subject,  and  as 
in  one  case  after  another  the  control  has  been  shown  to  result  in 
interference,  producing  the  results  it  was  invoked  to  prevent, 
the  interference  has  been  withdrawn,  and  in  its  place  there  has 
been  substituted  that  control  only  which  is  exercised  by  the 
state  over  all  property:  protecting  it  in  its  proper  use,  and 
preventing  its  employment  to  the  injury  of  others. 

In  all  the  transactions  of  trade  experience  has  shown  that  as 
1 each  one  works  for  his  own  interests,  he  equally  works  for  the 
greatest  good  of  the  greatest  number ; yet,  as  new  problems 
present  themselves  in  the  advancing  course  of  civilization,  it 
seems  to  be  the  tendency  ever  to  solve  them  by  state  interfer- 
ence. But  the  tendency  of  history  is  also  to  repeat  itself  in  this 
^ as  in  other  affairs  of  the  world,  and  the  injury  resulting  from 
' the  interference  leads  to  its  abandonment. 

The  railway  systems  of  the  world  seem  to  many  to  afford  a 
^ new  problem.  In  the  memory  of  men  still  living  the  first  loco- 
£ motive  was  run  in  the  United  States,  while  now  there  are  about 

4)  4G1 


462 


THE  NORTH  AMERICAN  REVIEW . 


one  hundred  and  twenty  thousand  miles  of  railroad  in  opera- 
tion — nearly  equal  to  the  mileage  of  the  rest  of  the  world  com- 
bined. The  importance  here  of  the  railroad,  entering  as  it  does 
into  every  interest  of  the  country,  naturally  results  in  a popular 
demand  for  a strict  control  of  it  by  the  law.  When  fifty  mill- 
ions of  active  people  are  every  day  affected  by  its  operations, 
there  must  be  frequent  complaints  and  many  injuries,  whatever 
may  be  the  principles  of  its  management.  Of  these  complaints 
many  no  doubt  arise  from  an  ignorance  of  the  causes  leading  to 
the  conditions  complained  of, — causes  which  are  beyond  the 
control  of  the  railroad  as  they  are  of  the  state.  For  the  cure 
of  these  real  or  imaginary  ills  the  remedy  at  once  suggested  is 
state  control ; not  by  the  redress  or  prevention  of  alleged  injus- 
tice or  oppression,  or  by  a trial  of  specific  cases  on  their 
merits ; but  by  an  effort  to  manage  the  whole  policy  and  direc- 
tion of  the  traffic  of  the  railroads, — to  fix  their  rates  and  direct 
their  operations. 

State  interference  in  the  management  of  railroads  and  the 
fixing  of  rates,  is  excused  on  the  ground  that  they  are  not  con- 
trolled, as  are  other  commercial  institutions,  by  competition.  For 
a popular  belief  this  is  natural  enough,  for  such  judgments  are 
generally  based  upon  the  information  derived  from  a few  uncertain 
facts,  together  with  the  misinformation  spread  by  the  politicians 
and  a portion  of  the  press.  A close  examination  of  the  subject 
will,  however,  show  that  the  rates  are  the  product  of  competition, 
and  are  determined  by  the  natural  law  of  all  commercial  trans- 
actions which  constantly  tends  to  reduce  profits  to  a minimum. 
Some  of  the  natural  forces  which  regulate  the  rates  charged  by 
railroads  I shall  notice  under  the  following  heads : 

First  Competition  of  capital. 

Second.  Competition  of  parallel  railroads  and  water  routes. 

Third.  Competition  of  markets. 

Fourth.  Efforts  of  the  railroads  to  increase  their  traffic  and 
net  income  by  decreasing  their  rates. 

First.  It  is  an  accepted  maxim  of  economics  that  the  value 
of  money  depends  upon  the  relations  existing  between  the 
demand  for  its  use  and  the  supply.  This  value,  represented  by 
the  rate  of  interest  which  is  paid  for  its  use,  constantly  tends 
to  equalize  itself  throughout  all  countries  and  in  all  invest- 
ments. The  differences  which  exist  in  the  rates  of  interest  in 
various  markets,  are  regulated  by  the  abundance  or  the  scarcity 


THE  RAILWAY  AND  THE  STATE. 


463 


of  capital  in  each,  compared  with  the  demand  for  its  use. 
The  differences  which  exist  in  the  rates  in  any  given  market 
are  determined  by  the  greater  or  less  certainty  of  the  return 
from  the  investments  in  which  the  capital  is  employed.  The 
constant  tendency  is  in  all  cases  for  the  interest  on  the  capital 
to  come  to  a uniform  rate  where  there  are  uniform  circumstances 
of  risk.  It  follows  that  under  the  free  operation  of  the  laws 
of  trade,  capital  invested  in  railroads  cannot  permanently,  or 
for  a long  time,  earn  a higher  rate  of  interest  than  capital  in- 
vested in  other  ways  where  the  uncertainty  of  return  is  not 
greater. 

With  the  threat  of  governmental  interference  in  the  control 
of  railroad  tariffs,  there  is  a new  element  introduced  which 
largely  adds  to  the  uncertainties  that  exist  to  a greater  or  less 
extent  under  the  natural  conditions.  The  capital  to  be  invested 
in  railroad  undertakings,  therefore,  demands  the  promise  of  a 
larger  return  than  would  otherwise  be  required.  Such  inter- 
ference, when  it  is  exercised  for  any  other  purpose  than  to 
redress  wrongs  and  to  prevent  injustice,  must  always  discourage 
the  investment  of  capital  in  new  lines  which  would  afford 
further  competition  5 and  a higher  rate  of  interest  will  be 
demanded  on  all  the  capital  invested  in  railroads  before  a new 
line  will  venture  in  the  same  field.  Thus  the  competition  of 
capital,  though  an  indirect,  is  yet  a powerful  element  in  deter- 
mining the  rates  charged  by  railroads.  Capital  is  eager  to 
locate  itself  where  is  the  fairest  promise  of  return.  But  if 
attacked  or  threatened,  it  flies  from  the  place,  and  only  the 
strongest  inducements  or  most  earnest  promises  can  again  lure 
it  back  to  the  distrusted  locality. 

Of  the  arrested  development  of  railroads  there  have  already 
been  some  conspicuous  cases  in  the  United  States,  for  instance, 
in  the  great  agricultural  States  of  the  west  and  north-west. 
These  are  some  distance  from  the  chief  markets  for  their  prod- 
ucts, and  the  item  of  transportation  thus  becomes  a prominent 
factor  in  the  cost  of  production  in  those  markets.  It  is  natural 
that,  under  these  circumstances,  any  charge  that  the  rates  of 
transportation  were  excessive  would  be  eagerly  received  by  the 
agricultural  class.  It  was  as  natural  that  the  politicians  should 
use  these  circumstances  to  their  advantage,  and  do  all  in  their 
power  to  increase  the  misunderstanding  between  the  farmer  and 
the  railroad.  The  farmer  was  urged  to  believe  himself  the 
yol.  cxxxviii. — no.  330.  32 


32 


464 


THE  NORTH  AMERICAN  REVIEW. 


miserable  villein  groaning  beneath  the  oppressions  of  his  feudal 
lord.  He  asserted  his  manhood  by  sending  a champion  of  his 
independence  to  the  Legislature.  The  conflict  of  natural  forces 
in  operation  upon  rates  was  interrupted,  and  the  problems  were 
supposed  to  be  solved  by  counting  heads  in  the  legislative  arena. 
In  1874  the  principal  laws  were  enacted  or  went  into  operation, 
which  authorized  the  state  to  fix  the  rates  that  private  corpora- 
tions and  individuals  should  charge  for  the  service  of  trans- 
porting or  storing  grain.  In  1876  the  constitutionality  of  the 
“ Granger  Acts  v was  affirmed  by  the  highest  court  of  the  land. 
The  effect  of  all  this  on  capital  is  illustrated  in  the  following 
statement  of  the  miles  of  railroad  constructed,  as  shown  in  the 
Report  on  internal  commerce  of  the  United  States  for  1880,  by 
Jos.  Nimmo,  Jr.,  Chief  of  the  Bureau  of  Statistics.* 

Miles  op  Railroad  Constructed  in  Illinois,  Wisconsin,  Minnesota,  Iowa, 
Missouri,  Kansas,  Nebraska,  and  Dakota,  yearly,  from  1872  to  1880 


inclusive. 

Year. 

No.  of  Miles. 

Year. 

No.  of  Miles. 

1872 

3086  

1877 

670 

1873  1130  1878  1254 

1874  509  1879 2465 


1875..., 

357  ... 

1880 

2915 

1876 

. 550 

Of  this  period,  the  Commissioner  of  Railroads  for  Minnesota 
remarks  as  follows : t 

“I  came  into  office  when  railroad  enterprise  was  paralyzed,  and  the 
general  prosperity  of  the  State  at  a low  ebb ; when  there  was  great 
animosity  among  the  people  toward  the  railroads.  I felt  it  my  duty  to  do 
everything  I could  to  allay  irritation  and  keep  the  peace  between  the  people 
and  the  railway  corporations,  to  the  end  that  our  large  agricultural  territory 
might  get  more  roads.  After  an  almost  total  suspension  of  railway  con- 
struction in  the  Western  and  North-western  States  for  three  years  (1874  to 
1876),  Minnesota  was  the  first  to  resume  building  roads,  and  kept  in  the 
lead  for  several  years,  until  we  had  substantially  a complete  system  of  trunk- 
lines. There  is,  to-day,  hardly  a cultivated  farm  in  the  State  from  which 
the  farmer  cannot  drive  to  a railroad  station  and  return  in  a day. 

“I  believe  that  the  avoidance  of  legislative  interference  with  rates,  and 
the  administration  of  this  office  in  a way  to  encourage  the  further  investment 
of  capital  in  railways  in  this  State,  has  had  an  appreciable  influence  in  this 
progress  and  development.  Now  that  we  have  so  many  powerful  corporations 
competing  for  business,  we  are  assured  that  branches  and  cross-lines  almost 
indefinite  will  be  constructed,  giving  in  a few  years  to  every  locality  the 
benefits  of  active  competition,  and  the  lowest  practicable  rates.” 

* Appendix,  p.  187.  t Report  1881,  p.  5. 


THE  RAILWAY  AND  THE  STATE. 


465 


The  great  depression  in  railroad  investment  during  this 
period  of  animosity  toward  the  companies  was,  no  doubt,  to 
some  extent  the  result  of  other  causes.  The  feeling  of  the  peo- 
ple, as  well  as  the  suspension  of  road  building,  were  both,  to  a 
great  extent,  the  effect  of  a common  depression  following  unwar- 
ranted anticipations  of  great  returns  from  all  investments.  Yet 
there  can  be  no  doubt  that,  other  causes  being  removed,  the 
threats  and  attacks  of  the  time  were  sufficient  to  drive  all 
movable  capital  from  the  field,  and  to  warrant  the  prediction  of 
Justices  Field  and  Strong  in  their  dissenting  opinion,  when  the 
decision  of  the  Supreme  Court  in  these  u Granger  cases  n was 
rendered.  u The  questions  thus  presented,”  they  say,  u are  of 
the  greatest  importance,  and  their  solution  must  materially 
affect  the  value  of  property  invested  in  railroads  to  the  amount 
of  many  hundreds  of  millions,  and  will  have  a great  influence 
in  encouraging  or  repelling  future  investments  in  such  property.” 

While  the  attitude  of  the  state  toward  railroads  is  of  such  a 
nature  that  no  dependence  can  be  placed  upon  its  actions,  the 
investment  of  capital  in  railroad  building  becomes  an  enterprise 
of  a highly  speculative  nature.  Great  returns  must  therefore 
be  promised  to  lure  the  capital  into  so  uncertain  a field.  The 
state  thus  becomes,  however  unwillingly,  the  enemy  of  capital, 
delays  the  construction  of  competitive  lines,  and  so  tends,  by  its 
interference,  to  maintain  higher  rates  of  transportation. 

Second.  Competition  of  parallel  lines,  by  water  or  rail,  is  the 
surest  possible  guaranty  of  the  lowest  rates  and  the  best  service. 
This  is  a generally  admitted  truth,  and  is  proven  by  all  ex- 
perience. So  important  has  this  direct  competition  been  con- 
sidered, that  a select  committee  of  the  United  States  Senate,  on 
transportation,  in  1874,  prescribed  it  as  the  best  remedy  for  the 
evils  connected  with  the  subject,  which  existed  or  were  antici- 
pated. In  the  conclusion  of  their  report  they  say : 

(‘We  are  unanimously  of  the  opinion  that  the  problem  of  cheap  trans- 
portation is  to  be  solved  through  competition,  as  hereinafter  stated,  rather 
than  by  direct  congressional  regulation  of  existing  lines.”  * 

To  effectively  secure  this  competition,  they  recommend  that 
the  Government  build  and  operate  a double  track  freight  rail- 
road from  the  Mississippi  River  to  the  Atlantic  Ocean ; and  tell 
us  that  if  this  road  were  used  to  its  fullest  extent,  by  having 

* VoL  I.,  p.  242. 


466 


THE  NORTH  AMERICAN  REVIEW. 


trains  follow  each  other  at  intervals  of  half  an  hour,  upon 
grades  where  thirty  or  thirty-five  cars  could  be  run  to  a locomo- 
tive, the  charge  on  shipments  in  bulk,  on  such  goods  as  western 
cereals,  might  not  exceed  seven  and  a half  mills  a ton  a mile.* 
The  rate  on  grain,  quoted  by  the  Committee,  between  Chicago 
and  New  York,  in  1872,  was  twelve  and  one-tenth  mills  a ton  a 
mile.  The  reduction  promised  by  the  Government  road  was, 
therefore,  four  and  six-tenths  mills. 

Congress  has  not  seen  fit  to  act  upon  the  recommendation  of 
the  Committee,  so  the  road  has  not  been  built.  But  by  leaving 
the  subject  to  private  interests,  not  only  has  the  danger  which 
at  the  time  was  apprehended  from  the  combination  of  the  East 
and  West  trunk-lines  not  been  realized,  but  the  rates  estab- 
lished by  the  Joint  Executive  Committee  representing  these 
lines,  are  now  greatly  below  the  rate  promised  by  the  Govern- 
ment road.  The  present  tariff  on  grain  and  flour  from  Chicago 
to  New  York  is  twenty-five  cents  a hundred  pounds,  or  five  and 
four-tenths  mills  a ton  a mile, — less  than  one-half  the  rate  of 
1872,  and  nearly  one-third  less  than  the  low  rate  promised  by 
the  Government  all-freight  road. 

This  result  has  been  accomplished  chiefly  through  the  compe- 
tition of  parallel  routes  by  water  and  by  rail  j though  we  shall 
see  that  similar,  if  not  as  radical,  results  would  be  secured  by 
other  forms  of  competition,  which  are  not  commonly  so  well 
understood. 

Third.  Markets  that  are  common  to  various  points  of  produc- 
tion or  supply  control  the  rates  from  all  these  points  by  the . 
competition  which  may  exist  with  any  one  of  them.  The  lowest 
rate  to  the  market  by  any  route,  controls  the  rates  by  all  the 
other  routes.  This  principle  is  well  shown  in  the  statement  of 
the  Manager  of  the  Great  Western  Railway  of  England. 

“It  will  fairly  illustrate  to  you,”  he  says,  “the  practice  with  regard  to 
some  of  the  grain  imported  into  this  country,  if  I explain  the  position  of 
Birmingham  and  South  Staffordshire,  which  is  a comparatively  small  district 
of  about  twelve  miles  square,  and  contains  a population  of  upwards  of  one 
million  persons,  and  therefore  consumes  large  quantities  of  foreign,  as  well 
as  home-grown  grain,  etc. 

“ This  district  can  be  and  is  supplied  from  Liverpool,  a distance  of  ninety- 
eight  miles  ; Gloucester,  fifty-three  miles ; Bristol,  ninety  miles  ; Newport, 
ninety-eight  miles ; and  Cardiff,  one  hundred  and  ten  miles  (taking  Birm- 
ingham as  the  place  to  measure  to).  It  will  be  seen  that  Gloucester  is  the 


Yol.  I.,  p.  154. 


THE  RAILWAY  AND  THE  STATE. 


467 


nearest  point,  and  as  it  is  connected  with  Birmingham  and  South  Staffordshire 
by  river  and  canal  navigation,  as  well  as  by  railways,  the  cost  of  conveyance 
of  American  grain  is  cheapest  from  that  place,  and  therefore  the  rates  from 
Bristol,  Liverpool,  Cardiff,  and  Newport,  have  to  be  fixed  so  as  to  enable 
these  ports  to  compete  with  Gloucester.”  * 

The  cost  of  American  grain  is  probably  the  same  at  each  of 
these  various  points  which  may  supply  the  market ; so  that  the 
route  having  the  longest  haul  can  charge  no  more  than  the  one 
having  the  shortest.  Though  they  are  not  parallel  lines,  yet 
as  they  go  to  the  same  market  they  come  directly  in  competi- 
tion with  one  another. 

The  same  rule  aids  in  determining  the  rates  on  grain  and 
provisions  from  various  producing  points  in  America  to  the  sea- 
board, and  the  ocean  rate  from  there  to  England.  u The  United 
Kingdom,”  we  are  told,  “ is  the  chief  grain  market  of  the  world. 
All  the  Indian  corn  and  about  fifty  per  cent,  of  the  wheat  con- 
sumed in  that  kingdom  is  from  foreign  countries.*’  t In  this 
market  the  chief  competitors  of  the  United  States  are  Russia, 
Germany,  Egypt,  Australia,  Canada,  and  India.  From  the  fields 
of  production  in  the  United  States,  then,  the  rates  are  controlled 
by  competition  with  the  different  routes  to  the  various  countries 
mentioned.  The  rate  from  Odessa,  on  the  Black  Sea,  to  Liver- 
pool affects  the  rate  by  sea  from  California,  as  well  as  by  rail 
from  Dakota. 

Now,  if  the  cost  of  production  in  Dakota  were  the  same  as  in 
Germany,  for  instance,  and  the  supply  in  either  case  were  suffi- 
cient to  meet  the  demand  of  Great  Britain,  the  rate  from  Dakota 
to  Liverpool  would  be  the  same  as  the  rate  from  the  place  of 
production  in  Germany  to  Liverpool.  If  it  were  not  as  low, 
Dakota  would  send  no  grain  to  that  market.  If,  however,  as  is 
the  case,  the  cost  of  production  in  Dakota  were  less  than  in 
Germany,  the  rate  from  the  former  place  would  be  such  as  to 
equalize  the  cost  of  production  in  the  market.  Now  transporta- 
tion is  a part  of  the  cost  of  production  in  the  market.  In  the 
place  where  grain  or  any  other  raw  material  is  produced,  trans- 
portation is,  of  course,  no  direct  element  in  its  cost.  But  at  the 
place  of  production  it  is  worthless ; it  must  be  brought  to 
market.  That  from  necessity  involves  an  additional  expense, 
and  this  additional  expense  is  a part  of  the  cost  of  production 

* Spl.  Kept.  Dep.  Agri.  U.  S.,  April,  1883,  p.  6. 

t U.  S.  Inter.  Commerce,  1880,  p.  175. 


468 


THE  NORTH  AMERICAN  REVIEW. . 


in  the  market.  This  fact  suggests  the  importance  and  power  of 
the  markets  in  regulating  the  rates  of  transportation.  This 
cost  of  production,  other  things  being  equal,  determines  who 
shall  sell  and  in  what  quantities.  The  selling  price  of  a com- 
modity is  there  determined  by  the  competition  of  all  sources  of 
supply  which  the  market  has.  These  may  be  so  close  at  hand 
that  the  transportation  is  an  unimportant  item ; or  may  be  in 
the  place  itself,  in  which  case  the  transportation  is  no  factor. 
To  meet  such  competition  the  transportation  company  is  com- 
pelled to  fix  its  rates  so  low  that  the  articles  produced  at  a 
distance  can  be  brought  to  the  market  at  a profit  to  the 
producer. 

This  force  of  competition  enters  into  the  determination  of 
the  rates  on  nearly  all  commodities  and  in  nearly  all  places.  It 
operates  most  powerfully  upon  those  things  which  are  consumed 
in  the  largest  quantities,  since  for  these  there  is  the  greatest 
demand  and  the  greatest  competition  in  their  sale.  It  tends  to 
reduce  to  a minimum  the  rates  on  grain,  provisions,  and  coal, 
and  affects  least  the  rates  on  silks,  broadcloth,  and  wines.  It 
results  in  differential  rates,  which,  while  they  cause  complaint 
from  some,  are  a source  of  the  greatest  benefit  to  the  many.  It 
produces  competition  between  places  where  otherwise  none 
exists ; it  brings  competition  to  commodities  which  before 
were  monopolies.  And  so,  in  its  effect,  by  constantly  tending 
to  reduce  the  selling  price,  it  restricts  profits  more  and  more 
and  brings  into  stronger  play  the  forces  determining  the  cost  of 
production.  Hence  result  an  action  and  reaction  which  contin- 
ually tend  to  reduce  the  price  of  commodities  to  consumers. 

Fourth . The  fourth  force  regulating  rates  is  found  in  the 
power  which  the  railroad  possesses  of  increasing  its  net  income 
by  increasing  its  traffic  at  lower  rates.  The  influence  of  this 
principle  in  the  regulation  of  rates  deserves  more  extended 
notice,  as  it  more  or  less  affects  all  rates  of  transportation, — of 
passengers  as  well  as  of  freight,  and  between  all  places. 

It  is  a principle  of  business  generally  understood,  that  more 
is  to  be  made  with  small  profits  and  large  sales  than  with  small 
sales  and  large  profits.  The  wholesale  merchant  has  a greater 
income,  because  his  transactions  are  much  greater;  but  the 
retailer  receives  a larger  profit  on  the  amount  of  the  business 
he  does.  The  lower  rates  of  the  wholesale  merchant  are,  how- 
ever, a result  of  economy  in  exchange  and  not  in  production. 


THE  RAILWAY  AND  THE  STATE . 


469 


Cotton  goods,  for  instance,  whether  sold  at  retail  or  wholesale, 
cost  the  same  at  the  factory ; and  they  must  in  any  case  he  sold 
at  an  advance  on  this  cost  to  realize  any  profit.  But  suppose  the 
demand  for  cotton  goods  to  he  so  limited  that  very  small  quan- 
tities were  manufactured ; while  the  factories,  machines,  engines, 
officers,  and  general  expenses  of  all  kinds,  were  the  same  as  with 
a much  greater  production.  Evidently  the  cost  of  production  of 
a single  yard  of  calico  would  he  greatly  increased.  But  suppos- 
ing, on  the  other  hand,  hy  an  increase  of  the  demand  tenfold, 
ten  times  the  amount  of  cotton  should  he  manufactured  without 
requiring  any  increase  of  factories,  engines,  machines,  or  man- 
agers, the  cost  of  producing  a yard  would  be  greatly  decreased. 
There  would  he  a greater  profit  to  the  manufacturer  now,  we 
may  assume,  in  selling  the  increased  production  at  one-half  the 
former  price,  than  there  would  he  with  the  former  rate  and  the 
much  smaller  sales. 

These  considerations  apply  with  much  greater  force  to  rail- 
roads. The  manufacture  of  cotton  goods  may  have  hut  partial 
influence  upon  the  demand,  and  unless  the  demand  is  increased 
an  increase  of  the  supply  at  lower  rates  would  result  only 
in  a loss.  There  are  times,  too,  as  there  are  many  things,  in 
which  the  reduction  of  prices  would  make  no  increase  of  con- 
sumption, and  would  be  at  the  expense  of  the  manufacturer. 
With  the  railroad,  however,  the  influences  of  all  kinds  of 
production,  of  manufacture  and  of  trade,  are  brought  to  bear. 
The  increase  of  production,  the  establishment  of  manufactures, 
and  the  extension  of  trade  into  new  fields,  in  all  of  its  various 
forms  and  branches,  constantly  offer  and  urge  upon  the  rail- 
road an  increase  of  traffic  at  lower  rates.  That  such  a decrease 
of  rates,  if  accompanied  by  a corresponding  increase  of  traffic, 
would  produce  larger  receipts  for  the  railroad  is  apparent 
enough.  The  important  fact  is  that  it  does  more  than  this, — it 
produces  a larger  net  profit.  This  follows  from  the  fact  that  the 
increase  of  traffic  is  not  accompanied  hy  a proportionate  increase 
of  expense. 

Some  of  the  expenses  of  a railroad  are  fixed,  and  remain 
unchanged  hy  any  increase  or  decrease  of  traffic.  Such,  for 
instance,  are  interest  (a  very  large  item)  and  administration.  A 
much  larger  number  arc  increased  in  a very  slight  degree  hy 
an  increase  of  traffic ; as  superintendence,  general  offices,  agen- 
cies, repairs  of  tracks,  bridges,  engines,  and  cars,  and  other 


470 


THE  NORTH  AMERICAN  REVIEW. 


expenses  of  a similar  nature.  What  other  charges  remain  are 
increased  by  an  increase  of  traffic  to  a somewhat  greater  degree, 
yet  by  no  means  in  proportion  to  the  increased  business.  An 
increase  of  traffic  thus  has  no  effect  on  large  items  of  the 
expenses  of  a railroad;  has  but  slight  effect  on  other  items 
which  comprise  the  larger  portion  of  the  company’s  expenses ; 
and  affects  in  a somewhat  greater  degree,  but  still  not  in  propor- 
tion to  the  increase  of  traffic,  the  remaining  items.  On  the 
whole,  it  will  be  seen  that  an  increase  of  traffic  may  be  carried  at 
a less  rate  and  still  afford  a larger  net  profit.  The  following 
statement  from  experience  illustrates  this  proposition : 


STATEMENT  OP  TONNAGE,  RATES,  AND  PROFITS  OF  FREIGHT  TRANSPORTED  BY  THE 
ROADS  NAMED  IN  1875,  COMPARED  WITH  1880.* 


1875. 

Miles 

of 

Road. 

Tons 
Canned 
One  Mile. 

Rate 
per  Ton 
Mile . 
Cts. 

Freight 

Earnings. 

Freight 

Expenses. 

Net  Earn- 
ings from 
Freight. 

Erie  Railway 

..  942... 

..1,016,618,050.. 

...1.208... 

.$12,287,399.. 

..$9,647,786.. 

. .$2,639,613 

Pennsylvania 

. 905... 

..1,479,414,466.. 

...1.058... 

. 15,651,741.. 

..  9,166,374.. 

..  6,535,367 

N.  Y.  Central 

.1,000.. 

..1,404,008,029. 

...1.275... 

. 17,899,702.. 

..12,639,005.. 

..  5,260,697 

P.  Ft.  Wayne  &C... 

. 468.. 

..  491,289,899., 

...1.111... 

. 5,430,511.. 

..  3,371,945.. 

..  2,058,566 

Average 

..  829.. 

..  997,832,611.. 

...1.163... 

. 12,817,338.. 

..  8,693,777.. 

..  4,123,561 

Average  to  one  mile 

of  road 

,f  1,203,651. 

...1.163... 

$15,461.. 

..  $10,487.. 

$4,974 

1880. 

Erie  Railway 

.1,010.. 

..1,721,112,095. 

...  .836... 

.$14,391,115.. 

. .$9,188,297. . 

..$5,202,818 

Pennsylvania 

..1,120.. 

. .2,298,317,323. 

...  .880... 

. 20,234,046.. 

..10,892,368.. 

..  9,341,678 

N.  Y.  Central 

..1,018.. 

..2,525,139,145. 

...  .879... 

. 22,199,966.. 

..13,670,884.. 

..  8,529,082 

P.  Ft.  Wayne  & C. . 

..  468.. 

..  806,257,399. 

...  .91  ... 

. 7,359,452.. 

..  4,069,097.. 

..  3,290,355 

Average 

..  904.. 

..1,837,706,486. 

...  .876... 

. 16,046,145.. 

..  9,455,162.. 

..  6,590,983 

Average  to  One  Mile 

of  Road 

1.. 

2,032,860. 

...  .876... 

$17,750.. 

$10,459.. 

$7,291 

Tonnage  per  mile 

C 1875. . . . 

X 1880 

2,032,860  — 

Rate  per  mile 

c 1875^ 

cents  1.163  ■■ 

1 1880 

“ .876  ■■ 

Profit  per  mile 

C 1875 

$4,974  - 

X 1880. . . . 

7,291  - 

It  will  be  noticed  that  the  decrease  of  rates  accompanied  by 
an  increase  of  tonnage  has  resulted  in  larger  profits.  This 
result  may  not  have  been  attained  by  the  voluntary  reduction 
of  rates  on  the  roads  named,  as  they  were  influenced,  perhaps, 
more  radically  in  a large  portion  of  their  traffic  by  direct  com- 

* Compiled  from  Poor’s  Manual,  1881,  pp.  39  -45. 


THE  RAILWAY  AND  THE  STATE. 


471 


petition  of  parallel  rail  and  water  routes.  But  similar  results 
have  obtained  everywhere,  whether  other  principles  of  competi- 
tion were  also  in  force  or  not.  The  Central  Pacific  Railroad 
Company,  for  instance,  is  often  mentioned  as  having  very  little 
competition  for  the  greater  portion  of  its  traffic.  Yet  we  find 
here  the  same  result.  For  the  period  of  six  years  ending 
December  31,  1882 — the  same  time  as  shown  for  the  above 
Eastern  roads,  but  bringing  the  date  down  two  years  later  — 
the  rates  indicate  a similar  relation  to  the  volume  of  traffic, 
showing  a steady  decrease  with  the  increase  of  business.  As 
other  forces  of  competition  have  here  been  in  less  active  force 
than  on  the  Eastern  lines,  the  reduction  in  rates  has  been  caused 
to  a much  greater  extent  through  the  efforts  of  the  company  to 
increase  its  traffic.  And  it  will  be  noticed  that  the  decrease 
between  the  first  and  last  years  of  those  given  has  been  greater 
on  the  Central  Pacific  than  upon  the  Eastern  lines ; while  the 
increase  of  traffic  has  been  greater  on  the  Eastern  lines  than  on 
the  Central  Pacific. 


STATEMENT  OF  FREIGHT  TRAFFIC,  RATES,  AND  GROSS  RECEIPTS  FROM  SAME,  ON  THE 
CENTRAL  PACIFIC  RAILROAD,  FROM  1877  TO  1882,  INCLUSIVE. 


Tons  carried  Gross 

Miles  one  mile  to  Bate  Receipts 

Year.  of  Tons  carried  each  mile  of  per  ton  from 

Road.  one  mile.  road.  per  mile.  Freight. 

cts. 

1877  1783  358,982,037  201,338  ..  2.71  $ 9,738,099 

1878  2119  392,281,712  ..  185,126  ..  2.75  ..  10,802,276 

1879  2319  ..  449,580,783  193,868  ..  2 43  10,934,574 

1880  2467  ..  665,063,768  229,050  ..  2.34  13,245,857 

1881  2707  733,285,889  270,885  ..  2.16  ..  15,842,139 

1882  3041  902,981,309  296,936  1.81  16,302,882 


(Compiled  from  “Poor’s  Manual”  for  the  different  years,  and  verified  by  the 
Annual  Reports  of  the  Company.) 


RATES. 


East........ 

Cent.  Pac. 


East 

Cent.  Pac. 


5 1875 ioo  per  cent. 

* 1880 76  “ 

5 1877 100  “ 

^ 1882  67  “ 

TONNAGE. 

5 1875 ioo  per  cent. 

< 1880 169  “ 

£ 1877 100  “ 

* 1882 147 


The  foregoing  exhibit  suggests  the  importance  of  the  rela- 
tion between  the  rates  and  the  volume  of  traffic.  Complaint 
is  often  made  by  those  who  have  overlooked  the  importance  of 


472 


THE  NORTH  AMERICAN  REVIEW. 

this  necessary  relation,  that  Western  lines  have  higher  rates  than 
the  Eastern  trunk-lines ; and  the  lack  of  direct  competition  of 
parallel  routes  is  commonly  assumed  as  the  cause.  Yet,  when 
the  volume  of  the  traffic  is  taken  into  consideration  in  connec- 
tion with  the  rates,  it  in  many  cases  seems  remarkable  that 
there  is  not  a greater  difference  in  the  rates  than  exists.  The  com- 
parative relations  of  the  tonnage,  rates,  and  gross  receipts  from 
freight  between  the  above  Eastern  and  Western  roads  for  the  last 
year  mentioned  is  as  follows : 

BATES  PER  TON  PER  MILE. 

East. 

Cent.Pac. 

1.81 

TONNAGE  «>ER  MILE  OP  ROAD. 

East. 

2,032,860 
Cent.  Pac. 

296,936  i. 

GROSS  FREIGHT  RECEIPTS  PER  MILE  OF  ROAD. 

East. 

$17,750  . — — -r.-m,,.  .in  ■ ■ 

Cent.  Pae. 

$5,361  -h*™**—— 

It  will  be  noticed  that,  notwithstanding  the  fact  that  the 
average  rate  of  the  Eastern  lines  given  is  about  twice  that  of  the 
Central  Pacific,  the  tonnage  of  the  former  is  so  much  greater 
that  the  gross  receipts  amount  to  about  three  and  a third  times 
as  much  as  with  the  Central  Pacific.  And  by  referring  to 
the  former  statement  it  will  be  seen  that  the  net  earnings  of  the 
Eastern  lines,  per  mile  of  road  operated  in  1880,  were  $7291 ; 
while  the  gross  earnings  (the  net  not  being  given)  of  the  Cen- 
tral Pacific  from  the  same  source  were,  in  1882,  $5361.  The 
difference  in  this  result  would  probably  be  to  some  extent 
equalized  if  the  interest  on  the  capital  invested  were  taken  into 
account,  many  of  the  Eastern  lines  having  double  tracks,  and  a 
larger  equipment  being  required  to  transport  the  much  greater 
tonnage.  But  taking  into  consideration  all  causes  of  difference 
which  may  occur  to  the  mind,  the  result  is  apparent  enough  that 
the  higher  rates  of  the  West  are  a necessity  of  the  much  smaller 
traffic.  And  we  have  before  seen  that  to  increase  this  traffic 
and  make  larger  net  profits,  reductions  in  rates  are  steadily 
being  made. 


THE  RAILWAY  AND  THE  STATE . 


473 


The  fact,  then,  becomes  apparent  that  the  reduction  of  rates 
will  increase  the  profits  of  the  railroad  if  accompanied  by  a cor- 
responding increase  of  traffic,  for  an  increase  of  traffic  reduces 
the  ratio  of  expenses ; so  the  greater  the  traffic  becomes  the 
greater  is  the  profit.  Now,  by  limiting  the  profit  of  producers, 
or  increasing  the  price  to  consumers,  the  production  and  the 
traffic  are  equally  limited ; the  general  wealth  and  the  profits  to 
the  railroad  are  both  restricted.  It  follows  from  the  necessity 
of  these  relations  that  an  increase  in  the  profits  of  the  railroad 
is  not  at  the  expense  of  the  community,  but  is  an  accompaniment 
of  that  general  increase  of  wealth  which  has  been  made  possible 
by  the  lower  rates  of  transportation. 

These  natural  principles  regulating  rates  all  urge  the  rail- 
roads to  increase  their  traffic,  as  by  this  means  the  greatest 
profits  are  secured.  The  possibility  of  a large  traffic  offers  the 
greatest  inducement  to  the  capitalist  to  construct  new  roads ; it 
gives  rise  to  the  most  active  competition  between  existing  lines  ; 
it  increases  the  competition  in  the  markets,  and  it  affords  always 
the  strongest  incentive  for  the  railroads  to  reduce  their  rates,  if 
by  this  means  their  existing  traffic  may  be  increased.  The  nat- 
ural principles  regulating  rates  are,  therefore,  competitive  forces  j 
the  railroads  are  everywhere  bidding  for  the  business,  and  where 
there  is  the  greatest  amount  of  business,  there  the  bidding  is 
most  active.  So,  where  there  is  the  least  traffic  there  is  the 
least  competition.  This  produces  an  important  result.  The 
rates  are  lowest  where  the  greatest  quantities  are  moved,  and 
highest  where  there  is  the  least  traffic.  As  the  decrease  in  the 
rate  of  expense  bears  an  approximate  proportion  to  the  increase 
of  the  amount  of  traffic,  the  connection  between  low  rates  and  a 
large  traffic  is  justified  on  the  ground  of  cost,  as  well  as  by  the 
necessities  of  commerce. 

But  there  is  an  incidental  result  which  is  important  to  note. 
The  greatest  traffic  is  possible  in  those  things  which  are  pro- 
duced in  the  largest  quantities,  and  for  which  the  demand  is 
practically  unlimited.  These,  therefore,  have  the  lowest  rates. 
They  constitute,  primarily,  the  necessities  of  life,  which  are  con- 
sumed by  all  5 and,  secondarily,  the  cheaper  articles  which  are 
the  common  comforts  of  the  poorer  classes.  As  commodities 
become  more  and  more  expensive  they  become  confined  to  a 
smaller  class,  their  consumption  becomes,  therefore,  more  re- 


474 


THE  NORTH  AMERICAN  REVIEW. 


stricted,  and  the  incentive  to  the  railroad  to  carry  them  at 
lower  rates  is  reduced  in  the  same  degree.  These  natural  prin- 
ciples affect  the  rates  of  transportation  exactly  as  similar  laws 
of  competition  in  trade  affect  prices.  They  tend  constantly  to 
cheapen,  first,  the  necessaries  of  life  ; second,  the  comforts  j and 
last  and  least,  the  luxuries.  Does  not  this  result  in  the  greatest 
good  for  the  greatest  number  ? 

Controlled  by  these  natural  forces  of  competition,  the  pro- 
prietor of  the  railroad  constantly  works  to  advance  the  in- 
terests of  the  patron.  In  seeking  to  increase  the  earnings  of 
the  corporation,  he  does  not  increase  rates ; but  in  virtue  of 
the  common  principles  of  commerce  by  which  he  is  bound,  the 
tendency  of  rates  as  of  prices  is  ever  toward  a minimum.  In 
seeking  to  advance  his  own  interests  he  works  equally  to  advance 
the  interests  of  the  shippers,  and  so  of  the  community  at  large. 
This  result,  which  is  recognized  by  the  Railroad  Commissioners 
of  Iowa,  is  seen  everywhere. 

11  Our  people,”  they  say,  “ are  directly  the  beneficiaries  of  a steadily  and 
continually  falling  rate.  This  reduction  of  rates  is  not  confined  to  the 
through  traffic ; it  applies  — in  a somewhat  smaller  ratio,  it  is  true  — to  the 
local  traffic  as  well,  which  is  demonstrated  in  tables  further  on,  prepared 
from  reliable  data  by  the  Commissioners.  What  it  is  that  has  produced  these 
reductions  in  charges  is  a question  rather  for  the  economist ; it  suffices  to  be 
able  to  point  them  out  and  to  know  that  they  are  welcome  tidings  alike  to 
producer  and  consumer.”  * 

The  railroad  cannot  lessen  its  traffic  without  reducing  its 
profits ; it  cannot  restrict  the  development  of  its  traffic  without 
limiting  its  profits.  To  injure  the  shipper  or  interfere  with  his 
interests  the  railroad  must  equally  injure  itself.  Is  it  not,  then, 
safer  and  better  to  leave  the  regulation,  classification,  and  es- 
tablishment of  rates  with  the  proprietors  under  the  control  of 
these  natural  forces,  than  to  delegate  it  to  a legislature  or  com- 
mission, whose  interests  in  its  proper  execution  are  relatively 
slight,  and  whose  information  at  the  best  cannot  be  compared 
to  that  of  those  who  make  it  the  business  of  their  lives  ? This 
leaves  great  power  with  the  corporation,  it  is  true,  but  the  power 
is  in  the  property.  To  shift  the  control  from  owners  to  com- 
missioners, only  shifts  it  from  the  responsible  and  interested  to 
the  irresponsible  and  non-interested.  It  does  not  remove  it; 
that  can  only  be  done  by  removing  the  road. 

* Report,  1881,  p.  7. 


THE  RAILWAY  AND  THE  STATE. 


475 


The  interests  of  the  community  and  of  the  railroad  equally 
require  the  greatest  possible  extension  of  trade ; the  greatest 
possible  movement  and  exchange  of  commodities.  The  control 
of  trade  by  the  state,  through  directing  the  management  and 
fixing  the  rates  of  railroads,  must  result,  as  similar  efforts  have 
resulted  in  the  past,  in  interference : in  restriction,  instead  of 
extension ; in  an  injury,  instead  of  a benefit.  The  best  possible 
results  to  all  will  follow  where  there  is  the  freest  operation  of 
the  natural  forces  of  competition. 


Gerrit  L.  Lansing. 


ILLUSIONS  OF  MEMORY. 


During  his  consulship  in  England,  Hawthorne  was  traveling 
near  Oxford,  and  while  visiting  Stanton  Harcourt  he  had  a 
curious  psychological  experience,  which  he  describes  in  u Our  Old 
Home.”  Nothing  about  this  locality  interested  him  more  than 
the  kitchen  of  the  ancient  castle.  Behind  a hearth  thirty  feet 
square  there  were  two  huge  fire-places,  used  in  olden  times  for 
roasting  oxen  whole,  while  the  smoke  found  its  way  through 
great  holes  in  the  roof  seventy  feet  above.  This  room  is  one  vast 
chimney,  the  rough  interior  walls  blackened  with  the  smoke 
and  soot  of  centuries,  and  lighted  only  from  the  apertures  above. 
“Now,  the  place,”  writes  Hawthorne,  “being  without  a paral- 
lel in  England,  and  therefore  necessarily  beyond  the  experience 
of  an  American,  it  is  somewhat  remarkable  that  while  we  stood 
gazing  at  the  kitchen,  I was  haunted  and  perplexed  by  an 
idea  that  somewhere  or  other  I had  seen  just  this  strange  spec- 
tacle before.  The  height,  the  blackness,  the  dismal  void  before 
my  eyes,  seemed  as  familiar  as  the  decorous  neatness  of  my 
grandmother’s  kitchen.” 

This  incident,  to  which  the  author’s  sequel  will  be  given 
later,  fairly  introduces,  I think,  the  following  study  of  a very 
odd  sentiment  that  sometimes  comes  over  us  in  the  ordinary  run 
of  thought  and  action, — that  the  entire  present  situation  is  not 
new,  but  merely  the  repetition  of  a former  one.  It  is  not 
always  easy  to  put  this  feeling  into  language  $ it  varies  from  the 
vaguest  suspicion  to  the  intensest  conviction.  We  exclaim 
inwardly:  “Why,  I have  seen  or  thought  this  all  before,”  and 
yet,  the  most  diligent  search  of  memory  failing  to  confirm  the 
impression,  we  infer  we  have  been  deceived.  In  all  this  there  is 
an  absence  of  the  slight  shock  occasioned  by  surprise,  but  at 
times  there  ensues  a feeling  of  uneasiness  and  actual  discomfort, 
especially  when  this  sense  of  earlier  experience  is  so  strong  that 

476 


